Patmon, Young & Kirk, Professional Corp. v. C. I. R., 75-2214

• Decision Date: 15 June 1976
• Docket Number: No. 75-2214,75-2214
• Parties: 76-2 USTC P 9487, 1 Employee Benefits Ca 1133 PATMON, YOUNG & KIRK, PROFESSIONAL CORPORATION, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 142

536 F.2d 142

76-2 USTC P 9487, 1 Employee Benefits Ca 1133

PATMON, YOUNG & KIRK, PROFESSIONAL CORPORATION, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 75-2214.

United States Court of Appeals Sixth Circuit.

Argued April 6, 1976.

Decided June 15, 1976.

Stanley R. Kirk, Patmon, Young & Kirk, Professional Corp., Detroit, Mich., for petitioner-appellant.

Scott P. Crampton, Gilbert E. Andrews, Asst. Attys. Gen., Alfred S. Lombardi, Tax Div., Dept. of Justice, Washington, D. C., Meade Whitaker, Internal Revenue Service, Washington, D. C., for respondent-appellee.

Before CELEBREZZE, MILLER ^* and LIVELY, Circuit Judges.

LIVELY, Circuit Judge.

The single issue for decision is whether a cash basis corporate taxpayer may deduct in the year of its delivery the value of a demand promissory note guaranteed by its stockholders and delivered to the trustees of its profit-sharing trust as a contribution to that trust where the note remains unpaid at the end of the taxable year. We hold that it is not entitled to the claimed deduction and affirm the Tax Court.

The facts were stipulated. Petitioner is a professional corporation organized under the laws of Michigan. The three officers, who are also the only shareholders and directors of the corporation, are practicing attorneys. On the day prior to the end of the corporation's fiscal year, October 30, 1970, the officers executed and delivered to the trustees of its profit-sharing trust (one of whom was Frederick A. Patmon, president and director of the corporation) an interest-bearing promissory note payable on demand. The three officer-directors of the corporation also executed an agreement guaranteeing payment of the note. The note was not paid prior to the end of the corporation's taxable year, and remained unpaid at the time of hearing before this court, though at least one payment of interest had been made. The respondent disallowed the face value of the note claimed as a deduction for the fiscal year ending October 31, 1970 and assessed a deficiency. The Tax Court upheld the Commissioner. 34 T.C.M. 798 (1975).

The deduction of contributions paid to pension and profit-sharing trusts is authorized by § 404(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 404(a). The question is whether execution and delivery of the notes described herein constituted payment.

In Eckert v. Burnet, 283 U.S. 140, 51 S.Ct. 373, 75 L.Ed. 911 (1931), the Supreme Court held that a cash basis taxpayer was not entitled to a bad debt deduction in the year in which he gave his personal note to a bank in exchange for a corporate note which he had guaranteed. Noting that the taxpayer had made no outlay of cash or property in the transaction, the Court stated, "A deduction may be permissible in the taxable year in which the petitioner pays cash." 283 U.S. at 141-142, 51 S.Ct. at 374. A somewhat similar transaction was involved in Helvering v. Price, 309 U.S. 409, 60 S.Ct. 673, 84 L.Ed. 836 (1940), where a cash basis taxpayer claimed a business loss deduction of the value of a personal note given by him in exchange for previous notes guaranteeing the value of assets involved in a bank merger. Relying on its decision in Eckert, supra, Chief Justice Hughes wrote for a unanimous Court

As the return was on the cash basis, there could be no deduction in the year 1932, unless the substitution of respondent's note in that year constituted a payment in cash or its equivalent. There was no cash payment and under the doctrine of the Eckert case the giving of the taxpayer's own note was not the equivalent of cash to entitle the taxpayer to the deduction. 309 U.S. at 413, 60 S.Ct. at 673.

In Price the taxpayer argued that the fact that his note was secured took it outside the Eckert rule. The Court held, however, that this fact was immaterial " . . . the giving of security for performance did not transform the promise into the payment required to constitute a deductible loss in the taxable year." Id. at 414, 60 S.Ct. at 676 (citation omitted).

Though the two Supreme Court decisions here cited did not deal with deductions under § 404(a), the principles which they enunciated apply to all claims for income tax deductions by cash basis taxpayers. There must be a payment of cash or property having a cash value in the year for which the deduction is claimed. The giving of a note which remains unpaid at the end of the taxable year does not meet this requirement. Our decision is consistent with past holdings of this court. In Embry Realty Co. v. Glenn, 116 F.2d 682 (6th Cir. 1940), the court held that salary increases voted by a cash basis corporate taxpayer which were not paid during the tax year in which they were claimed as a deduction could not be deducted in that year. In Consumers Power Co. v. United States, 427 F.2d 78 (6th Cir.), cert. denied, 400 U.S. 925, 91 S.Ct. 186, 27 L.Ed.2d 185 (1970), we held that death benefit certificates issued to retiring employees were deferred compensation subject to 26 U.S.C. § 404(a) and thus " . . . Consumers can only deduct the amount of death benefits paid under its plan in the years in which the payments are actually made." 427 F.2d at 80.

Cases cited by petitioner which involve accrual basis taxpayers are not in point. See Wasatch Chemical...